Compliance roundup: December

Regulators were in attendance at the Borden Ladner Gervais (BLG) compliance conference in Toronto last month, answering—and asking—tough questions on hot topics.

01 OSC addresses industry reaction to fiduciary standard

Debra Foubert, the OSC’s director of compliance and registrant regulation, didn’t mince words when BLG partner Prema Thiele took her to task on the proposed best interest standard.

Thiele, playing on the TV series Breaking Bad, put this to Foubert: “The show […] uses the term ‘dark territory’ to refer to a section of railway track that’s not controlled by signals. For me, the proposed best interest standard is dark territory. [The] industry reaction [is that it] isn’t necessary at this time because it would result in an unwelcome detour from the current enhanced regulatory framework—CRM II and Point of Sale.” Foubert noted CSA is still assessing comment letters and input given at three roundtables. “This is […] a complex problem and requires careful consideration to determine the right approach for Canada,” she said. “We appreciate that there are multiple initiatives [with] multi-year implementation plans, [such as] CRM II. [They’re] a step in the right direction but don’t totally address the issues raised in the best interest consultation paper.”

Foubert says a fiduciary standard would address a number of issues, including:

• the expectation gap between clients and industry participants: clients think dealers are acting in their best interests, but the current requirement is suitability, “which is a lower standard of conduct. Suitable investments aren’t always in the client’s best interest.”
• conflict of interest rules that are less effective than intended: “Conflicts can relate to product features [or] compensation structures [and] can have an adverse impact on clients.”

Foubert said the regulator is “definitely aware of the interconnectedness of the mutual fund [fees] and best interest consultation paper[s]. We’re looking at them together.”

She also said regulatory sights are set on advisor titles. “Are the registrants sitting across the desk from clients providing advice, or are they salespeople? Are titles misleading and causing confusion for investors? Those questions need to be answered.”

Also in attendance was Karen McGuinness, senior vice president of member regulation and compliance at the MFDA. Asked what keeps her awake at night, she said outside business activities, sale of high-risk exempt securities and leveraging. They’ll be on the MFDA’s agenda for 2014, and so will the following:

• referral arrangements
• conflicts of interest
• social media
• senior-citizen investors

02 Update on national regulator

On September 19, Ontario, B.C. and the federal government announced an agreement to establish a co-operative capital markets regulator, and invited other provinces to join. It was a big step in the long process towards creating a national regulator.

We need a formula!

Conference panelist Matt Williams, a partner at BLG, notes CRM II requires registrants to provide clients with the money-weighted rate of return. Problem is, the regulator hasn’t prescribed a formula for doing the calculation. As of now, the requirement is to use one that’s “generally accepted in the industry.”

A little vague, to say the least.

Addressing Debra Foubert, the OSC’s director of compliance and registrant regulation, Williams suggested that “in the next little while, we’re going to need an FAQ guidance on how this is going to work. [That way], before spend[ing] large sums updating systems, [firms will] understand what’s required.”

The Canadian Securities Transition Office’s executive vice president and senior policy advisor, Lawrence Ritchie, was a panelist at the conference and explained the endgame of the Ontario-B.C. initiative. He also provided an update on its progress.

The two provinces will have a common regulator and a uniform securities act. There will be a “complementary federal act that addresses criminal matters, systemic risk and national data collection,” he said. “The regulator would administer both the federal and provincial acts under authority delegated to it [by the participating jurisdictions].”

The common regulator would be accountable to the legislative bodies of the participating jurisdictions through a council of ministers. “It would be directed by an expert board […] appointed by the council of ministers based on recommendations from an independent nominating committee.”

Ritchie notes there would be “a simplified fee structure designed to ensure the organization is self-funding.”

So that’s what it’ll look like. But when will we see it? Ritchie points out that the agreement sets out the following timeline:

• January 31, 2014: Participating parties will execute a memorandum of agreement with proposed legislation attached.
• March 31, 2014: Publication of the initial draft regulations for public comment. Recognizing that participating jurisdictions will be agreeing on the proposed regulations, and that the agreement states the co-operative system “would preserve the elements of the current system that work well,” Ritchie anticipates the new system would be evolutionary, not revolutionary.
• May 30, 2014: Execution of integration agreements.
• December 31, 2014: Participating jurisdictions will enact the legislation.
• July 2015: Co-operative regulator operational.

Are you worried about CRM II?

Implementation is being phased in over the next three years but it’s best to get a head start. To help you prepare for the new requirements, industry guru André Fok Kam explains the ins and outs of CRM II’s performance reporting requirements in our Continuing Education offerings.

03 IIROC launches glossary of financial certifications

IIROC has created an online tool that explains advisor certifications. “We created the IIROC Glossary of Financial Certifications to help investors understand what these various certifications mean and what is required to achieve them,” the regulator’s president and CEO, Susan Wolburgh Jenah, said in a press release.

The glossary offers the following information on 42 common certifications:

• the issuing organization;
• the status of the professional within the issuing organization;
• the type(s) of exams required to be certified;
• other prerequisites, including education and experience;
• ongoing continuing education requirements; and
• investor complaint and public disciplinary processes of the issuing organizations, where available.

IIROC stresses it “does not grant, approve, endorse or rank any financial professional or advisor titles.”

Marsha Gerhart, a lawyer at BLG, applauds the move. “It’s a great opportunity to educate clients, so IIROC reps should use it to their advantage. They can direct clients to the website to learn about [these] certifications and why they’re important.”